Capital structure, firm value and managerial ownership: Evidence from East African countries

East African firms are experiencing economic growth and are attracting foreign investment in the form of equity capital and loans. However, there are concerns about whether the structure of the capital and managerial ownership of these firms can influence their growth. The study examined the relationship between capital structure and firm value in East African countries and how managerial ownership influences this relationship. Sixty-five (65) listed firms in East Africa were selected for the study. The study employed a GMM estimation technique. The evidence showed that leverage has a significantly negative impact on the value of firms in East Africa, suggesting that higher debt would result in a decrease of firm value. The implication of this result is that firms can increase their value by reducing their leverage level. Moreover, the study found that managerial ownership had an inverse and significant impact on the relationship between leverage and firm value. The conclusion is that leverage decreases the value of firms in East Africa. Another conclusion is that owner-managers can use debt capital more effectively to increase firm value than non-owner managers. The implication of this result is that firms managed by owners can borrow more for their operations because it would increase the value of the firms. This study is the first to examine how managerial ownership moderates the relationship between capital structure and the value of firms in East Africa, which has a unique political, social, cultural and economic environment.


INTRODUCTION
The decisions about firms' finance and capital structure occupy an important place in firms' management. This is because firms' decisions regarding the use of different forms of financing lead to different capital structures, which may have different influences on the performance of a firm (Pandey & Sahu, 2019). This makes financing decisions one of the major issues in business management. Therefore, the choice of specific capital structure by firms may have different impacts on the performance of firms. However, there are different perspectives on the studies on capital structure, some of which affirm earlier theories such as Modigliani and Miller (1958). Other studies also focus on the agency costs and pecking order theories, which postulate that companies should balance their capital structure to generate an optimal structure that can improve their performance (Ibrahim & Zulkafli, 2018).
One major reason why capital structure is considered important is that it has several implications for corporate performance, which is why several studies have been done. Modigliani and Miller (1958) stressed that under ideal conditions and without bankruptcy costs, a firm's capital structure has no influence on its performance. Different studies such as those of Cheng et al. (2010) and Myers (2001) Modigliani and Miller's (1958) theory of the irrelevance of capital structure. These authors maintain that capital structure is irrelevant to a firm's performance. However, contemporary studies such as Goh et al. (2018), Nenu et al. (2018) and Wu (2019) demonstrated that capital structure is relevant and therefore influences the performance and value of firms. According to these authors, an inappropriate combination of finance can be challenging to managers and the prospects of firms. Whilst the argument on the relevance of capital structure is inconclusive, other studies such as Vu et al. (2018) and Elmagrhi et al. (2018) hold the view that an argument about the relevance of capital structure is meaningless if it is not done in conjunction with the ownership structure of firms.
There is an argument that the ownership structure of a firm would affect the extent to which capital structure would influence a firm's performance. In fact, Vu et al. (2018) and Elmagrhi et al. (2018) contend that firms managed by owners would have the best capital mix and would eventually reap their benefits. This suggests that the choice of a specific capital structure would have a minimal effect on firms' performance unless specific characteristics of management prevail. Therefore, Migliori et al. (2018) argue that firms managed by owners would make a better choice on capital structure than those managed by individuals who are not owners. The paradox is that Modigliani and Miller's (1958) theory, which is supported by Cheng et al. (2010), maintains that capital structure is irrelevant to the financial performance of firms. However, studies such as Maina and Ishmail (2014), Suardi and Noor (2015), Akomeah et al. (2018) and Nguyen (2019) contradict this position by demonstrating that capital structure influences the performance of a firm. San and Hang (2011), on the other hand, argue that the benefits of the appropriate capital are linked to a firm's management structure.
The foregoing discussion shows that the implication of firms' capital structure for their performance is important. Equally, the discussion shows that the ownership structure plays a key role in benefiting from an optimal capital structure. This issue has not been fully addressed in the literature. However, previous studies focused on developed countries and provided conflicting empirical results. Therefore, debates abound on whether such studies have universal relevance, especially since developing countries operate under distinct political, economic, legal, social and cultural environments. Particularly, studies on the link between capital structure and firms' performance and how managerial ownership moderates this relationship have received little attention in developing countries, especially in East Africa. These inconclusive anecdotal results and the gap in the literature require that this topic must be revisited to provide fresh evidence on the relationship between capital structure and the value of firms in East Africa, as well as how managerial ownership moderates this relationship. Therefore, this study examines the extent to which capital structure affects the value of firms in East Africa and how managerial ownership moderates this relationship. This study makes contribution to knowledge on the theoretical puzzle of the economic relevance of capital structure to a firm through an analysis of country-level data.

Capital structure
The majority of firms fail as a result of challenges facing managers and owners on financing decisions. This is because, most firms and organizations fail or perform poorly because of diverse challenges managers or owners face regarding financing decisions (Migliori et al., 2018). This phenomenon gained considerable attention among financial economists after the formulation of Modigliani and Miller's (1958) capital structure irrelevance theory. Capital structure is defined as a mixture of different sources of finance of a company, represented by equity capital, preference shares, and debt. In addition, capital structure is the financing structure of the general operations and growth of a company, which involves a mixture of specific retained earnings, short-term debt, long-term debt, equity capital and preferred stock (Awais et al., 2016;Wu, 2019).
In other words, capital structure is the use of diverse sources of capital to finance the operations of a firm to achieve its strategic goals (Suardi & Noor, 2015). The choice of capital is, therefore, a critical financing decision, since it is directly linked to a firm's risk and return. This suggests that firms have the choice of using either equity or debt to finance their assets. However, Wu (2019) maintains that the best mix is the use of both debt and equity capital. Ibrahim and Zulkafli (2018) also maintain that several sources of finance are available to firms, but these sources can be organized into two, namely, internal and external finance sources. The external sources of financing consist of bond issuance and short-and long-term loans, whilst the internal sources of finance comprise equity stock, retained earnings, reserves, and preferred stock.
Many researchers such as Migliori et al. (2018) and Salam and Shourkashti (2019) maintain that there is an optimal capital structure, which involves the one that increases the wealth and value of shareholders whilst minimizing the cost of capital. However, Pinto and Quadras (2016) argue that it is difficult for managers of firms to decide an accurate and optimal capital structure, since it involves uncertainty and risks. Many studies have however used Modigliani and Miller's (1958) irrelevance theory to focus on finding an optimum capital structure. However, those studies were based on unrealistic assumptions, which is the use of Modigliani and Miller's (1958) irrelevance theory. Therefore, other theories offer a basis for researchers to conduct studies on the relevance or irrelevance of capital structure.

Theoretical framework
There are many capital structure theories, each of which facilitates the understanding of the debt-equity structure of firms. However, this study is conducted within the framework of agency cost theory. This theory states that the segregation of ownership and control in contemporary capitalism gives rise to the problem of agency (Jensen & Meckling, 1976;. In addition, this phenomenon results in the asymmetry of information as managers would have more information than owners. This suggests that potentially, conflict exists between managers and owners of firms and further between owners and debtors. This is because managers may pursue highly profitable and risky projects to attain their personal interests first (Masulis, 1983). In this instance, managers consider incentives and rewards associated with each source of capital before shareholders' interests, which is to maximize the value of firms.
Pandey and Sahu (2019) have a different viewpoint on the agency cost theory. According to the authors, as companies are supposed to pursue new investment opportunities, firms with high growth prospects would take more bonds and loans for this purpose, as opposed to firms with low growth opportunities. This would expose the companies to bankruptcy risk because the continuous increment of debt capital would increase the cost of debt, which may lead to a decrease in the performance of firms (Ibrahim & Zulkafli, 2018). Moreover, the agency cost theory can be associated with bankruptcy risk from another perspective (Soumadi, 2012). This perspective espouses that the management of firms regards bankruptcy as a high cost, it may therefore deter managers from acquiring more debt capital because of the fear of losing control of the firm and their personal benefits and reputations (Soumadi, 2012;Maama & Mkhize, 2020). In this context, debt would create an incentive for managers to work harder. In addition, the fear of losing control and reputation would motivate management to pursue the best investment opportunities, which would reduce the possibility of bankruptcy, reduce the cost of debt and increase firms' performance.
From the foregoing discussion, it is obvious that the capital structure would have an influence on the manager's attitude and performance because of the perceived agency cost associated with the use of resources. In this case, managers are expected to use the available resources effectively and efficiently to increase the value of a firm. This suggests that the motivation of managers to use the resources in the best possible manner would be more pronounced if the managers are also the owners of a firm. This implies that the problem of agency cost occurs because the separation of ownership and control would be reduced and eliminated if firms are managed by managers. Therefore, managers who are owners would act in the best interests of firms because the interests of the firms would supersede their personal interests. Based on the weight of empirical evidence, the following agency-related hypotheses are formulated.
The capital structure of a firm has a positive relationship with its value.
H 2 : Managerial ownership moderates the link between capital structure and firm value.

Empirical literature review
Studies that examined the relationships between managerial ownership, capital structure and the value of firms are sparse and fragmented. This is because the prior studies concentrated on the relationships between only two of the variables, leaving out the moderating relationships among them. One of such studies is that of Berger et al. The prior studies discussed in the preceding chapters show that a relationship exists between managerial ownership, capital structure, and firm value. These studies concentrated on a single country, thus making generalization difficult. Moreover, empirical support for the moderating role of managerial ownership in explaining the association between firms' value and capital structure is quite limited. This leaves a gap in the literature that needed to be field, hence this study.

AIMS
The aim of the study is to investigate the relationship between capital structure and firm value in East African countries and how managerial ownership influences this relationship. The specific objectives of the research are as follows.
1. To examine the relationship between capital structure and firm value in East African countries.
2. To establish whether managerial ownership moderates the relationship between capital structure and firm value.

DATA AND METHODOLOGY
The population of the study comprised all firms listed on the following stock exchanges: Nairobi, Dar es Salaam, and Uganda stock exchanges. However, financial institutions were excluded because of the peculiarity of their capital structure. The data for the study covered ten years, from 2009 to 2018. The criteria for selecting the firms were based on the availability of data for at least five (5) continuous years. In addition, firms that had been listed for less than 5 years were excluded.
The moderating role of managerial ownership in the relationship between capital structure and firm value is introduced in the model 2 below.
The explanation of the variables is provided below.

Multicollinearity test
The results of the multicollinearity tests are presented in Table 3. Specifically, Table 3 tests for the presence or otherwise of multicollinearity among the independent variables using both Pearson cor- relation coefficient and variance inflation factor (VIF). The results show that the correlation coefficients among the variables are small, which suggests that there is no problem of multicollinearity among the independent variables. It can be ascertained from Table 3 that the highest coefficients are -0.547 and -0.495, which are the correlation between managerial ownership and size and leverage and Tobin's Q respectively. Another biggest correlation coefficient is the correlation between size and Tobin's Q (r = 0.483) and correlation between size and ROA (r = 0.474). Apart from these, the other correlation coefficients are less than 0.40. These correlation coefficients show that there is an absence of multicollinearity among the variables because York (2012) suggests that collinearity exists when the correlation coefficient is more than 0.80. The VIF results confirm that there is no problem of multicollinearity among the variables because the VIF results are significantly lower than Salmeron et al.'s (2018) threshold of 10. Table 4 presents the results of the link between the capital structure and the value (Tobin's Q) of listed firms in East Africa. The results were estimated using a GMM estimation technique. However, the study employed three other estimation techniques, comprising pooled OLS, fixed effect and random effect to check for the robustness and authenticity of the results of the GMM technique. The results show that the directions of the relationship of different techniques are identical, which suggests that the results are reliable. First, the results show that lagged Tobin's Q (TobinsQ it-1 ) has a positive and significant link with Tobin's Q. This shows that the current value of firms is explained by their previous value.

Regression results
Hypothesis 1 (H 1 ) predicted a positive association between leverage and firm value. Contrary to the expectation, the results presented in Table  4 show that the leverage of the firms has a negative (-0.1372) and significant (p<0.000) impact on Tobin's Q. The implication of this finding is that a large component of debt in a firm's capital decreases its value (Tobin's Q). This result suggests that an increase in a firms' leverage would lead to a decrease in the value of the firms. Surprisingly, this result contrast with the agency cost theory of capital structure, which expects a positive link between capital structure (leverage) and firms' value. Moreover, this result is inconsistent with the capital irrelevance theory of Modigliani and Miller, which maintains that capital structure has no impact on firms' value. The reason that might explain this inverse association between leverage and firms' value is the high-interest rate on debt in developing countries. This suggests that interest paid on debt might be too high, which will negatively affect the profitability of these firms. Additionally, the interest-bearing debt normally restricts the use of firms' assets, especially when the assets are used as collaterals. This might limit the extent to which these firms can use the assets in their operations to generate income. Moreover, the existence of debt might commit the firms to fixed interest and principal payments in the future, hence forcing managers to postpone available net present value projects. Eventually, these would negatively impact the value of firms. This  Hypothesis 2 (H 2 ) predicted that managerial ownership influences the link between capital structure and firm value. Affirming the hypothesis, the results show that managerial ownership (Lev*MO) has a negative and significant (p<0.5) impact on the association between leverage and firms' value. This suggests that managerial ownership helps to better moderate the link between capital structure and firm value. This result implies that firms managed by owners can use debt financing to increase their values as opposed to firms not managed by owners. The moderating role played by the ownership structure can be explained by the fact that the owner-managers are able to work effectively to ensure that they obtain favourable loan terms to increase firm value. This is because the owner-managers are careful of losing control of their business, hence they would be meticulous with every loan condition which will contribute to the improvement in the value of firms. This indicates that the fear of losing control and reputation might motivate management to pursue the best source of finance which would reduce the possibility of bankruptcy, reduce the cost of debt and increase firms' performance.
Another possible explanation of this result is that firms managed by owners would make a better choice on capital structure than those managed by individuals who are not owners. This implies that the motivation of managers to use the resources in the best possible manner to improve the performance and value of a company would be more pronounced

CONCLUSION
The study employed a GMM estimation technique to examine the impact of capital structure on the value of listed firms in East Africa. In addition, the study investigated the extent to which managerial ownership moderates the relationship between capital structure and firm value. Data were collected from Dar es Salaam, Nairobi, and Ugandan stock exchanges. Tobin's Q was used as a measure of firm value, whilst leverage was used to proxy capital structure. The evidence showed that capital structure measured by firms' leverage has a significantly negative relationship with the value of firms in East Africa. This result suggests that higher leverage would lead to a decline in firm value. The implication of this result is that firms can increase their value by reducing their leverage level. Moreover, the study found that managerial ownership negatively and significantly moderates the relationship between capital structure and the value of the firms. This result implies that firms managed by owners can use debt capital effectively to increase their value. These results are inconsistent with both capital irrelevance theory and agency cost theory. The conclusion is that leverage de-creases the value of firms in East Africa. Another conclusion is that owner-managers can use debt capital more effectively to increase firm value.
The implication of these results is that firms can increase their value by relying less on debt to finance their operations, since such firms would be considered to be less risky. Based on these results, it is recommended that the management of firms should moderate the extent to which they use debt capital in their businesses. In addition, the management of the firms must analyze the possible impact of debt on firm value before sourcing for them. Though, these results are insightful, however some limitations are acknowledged, which provides opportunities for further studies. First, the study measured firms' value by Tobins' Q. By doing so, it fails to consider how investors actually view and react to debt capital acquisition. This study therefore recommends that another investigation must look at how the market price of shares relate to capital structure. In addition, another study can look at the factors affecting these firms' capital structure decisions.